The life cycle of a new company: You come public with one-fifth to one-tenth of your total shares. You pump up the offering by visiting 24 cities. You meet one-on-one with large institutions and you have a big luncheon and breakfast where you outline that you will beat the numbers that you talk about in the prospectus. Handily.
Institutions get just enough stock that some decide to build their positions while others kick, or flip, it. If the stock stays at a premium, daytraders without a lot of capital and at-home traders buy in because they know that the ones that stay at a premium are going to move way up. They know this because that means that some of the big mutual funds that determine how a stock does in the aftermarket are accumulating positions.
(No, there is no list. They just see the pattern. It is defined by the chart. You want to know which ones are under this accumulation? Read
Gary B. Smith. He tells you every day. Technical analysis is a pictorial rendering of this process.)
The ownership becomes an amalgam of
types (gee, it's always these guys at the margin, isn't it?), daytraders, many of whom are trying to run ahead of Pilgrim's buys, and momentum-oriented do-it-yourselfers. (I am not passing judgment on these; I am just stating facts. Lay off the nasty emails. I don't care how it happens.)
After six months, the company and many of the insiders, including the increasingly antsy venture capitalists, want out. They can't believe themselves that their stocks have moved up so much. They can't believe their companies are worth $20 billion to $30 billion. Their spouses are telling them they are nuts if they don't take something off the table. Their accountants are telling them they are nuts. Their friends are saying, "You better grab some of that from the table before it goes away."
Ahh, but there is a problem. That price, that high price, is predicated upon a small float. You can let a little stock go in the open market, but what you really need is a secondary that allows everybody to get out of some stock. To get that secondary done so a lot of stock can be sold, it must be done "in the hole." It can't be done in-line; the market won't bear it.
These baby billion companies aren't really ready for their market cap.
If more supply hits, more institutions have to be found to join in. There are not, however, enough institutions that play this game. Yet. Not at these exalted, some would say, artificially created prices. And the at-home and daytrader types aren't real buyers of secondaries. They don't have that kind of firepower. They can't take down huge gobs in-line.
So the merchandise has to be brought down in price.
For the first year of this new process, the stocks came down 20 or 30 points, then the deals were priced another 10 points down and
and rallied, in part because business was good, and in part because mutual funds needed more growth in their portfolios. It was good to go into the secondaries.
For the past few months, the brokerage houses have had to move these stocks down 50, 60 points to find buyers, and even then the stocks don't spring back -- even when they are priced in the hole.
For the past few weeks, companies that want to do secondaries have seen their stocks go down as much as 100 points, and still there is no bounce to the underwritings. The buyers are getting killed on this stuff, just slaughtered. They are losing their appetite for more bloodshed.
It is in that climate of fear that
, which was about to do a secondary,
descended upon us yesterday. As tempting as that secondary might have been, it now seems like a blessing that it was killed because this debacle could have happened after the pricing. And a quarter could have been destroyed, if not a year.
Notice, not once in this article did I care or bother to mention the fundamentals of the underlying business. Until yesterday, everybody accepted at face value the claims that the underlying businesses were growing like wildfire. I know I did.
After yesterday, nobody will assume the same about these big software-contract companies -- until after the quarters are reported and we are more certain. Which is why yesterday did change things
for a certain portion of the market: the giant packaged software portion
Many of you emailed me and said, "I want to buy when Cramer's scared."
Terrific, be my guest. Go buy these companies that make these kinds of contracts. But understand, I am not scared because of the fundamentals. I am scared because I want to find out who else is recognizing income like MicroStrategy before I buy any more of these types of stocks.
Look, we all have our idiosyncrasies. I hate it when stocks blow up for accounting reasons. Sure, no one thinks that MicroStrategy is
. But I had a year taken away in Cendant, so excuse me for being ultra-sensitive to accounting problems. If I weren't scared when accounting problems hit, I should get out of the business.
Remember, you can't game accounting gimmickry. That's why I have a large Post-It at the bottom of my screen that says: "Accounting Irregularities=Sell."
You can't dismiss declines caused by accounting irregularities as something that will come right back.
, the real bad ones, don't come back. We really don't know how bad MicroStrategy is. But we knew three things about MicroStrategy:
- It was a Red Hot stock owned by the momentum guys.
We thought the business was smokin', but it wasn't.
It, like virtually every stock that is near its 52-week high on the
Nasdaq, was trying to do a secondary. Its chief spokesman had already given away millions of dollars that the secondary was supposed to net him.
Sorry, readers, but where I come from, that's my worst nightmare. Maidens in the volcanos, gritted teeth and ice water veins, buying when you can, not when you have to ... these nice homilies can't trump accounting woes.
Excuse me while I avoid the next MicroStrategy by sticking with seasoned tech and avoiding companies that can fudge revenue recognition.
I have to live to tell about this era. These stocks will kill you.
James J. Cramer is manager of a hedge fund and co-founder of TheStreet.com. At time of publication, his fund had no positions in any stocks mentioned. His fund often buys and sells securities that are the subject of his columns, both before and after the columns are published, and the positions that his fund takes may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Cramer's writings provide insights into the dynamics of money management and are not a solicitation for transactions. While he cannot provide investment advice or recommendations, he invites you to comment on his column at